One of the biggest questions heading into retirement is surprisingly simple: How much can I comfortably spend?
After years of earning a paycheck and building your savings, switching to a time when you’re relying more heavily on those savings can take some getting used to. It’s understandable that almost half of Americans worry about running out of money in retirement.
A retirement budget can help you put some numbers around that uncertainty. These three retirement budgeting tips can help you think through your spending, prepare for expenses that may change over time, and build a budget around the retirement you have planned.
1. Identify Flexible Spending Categories
As you build your budget, organize it based on needs. Every single expense should be identified as either fixed or variable and essential or non-essential. For example, your housing expenses are fixed and essential. Food is essential, but it is a variable expense. A gym or country club membership may be fixed, but it is non-essential. Other forms of leisure or travel are likely variable and non-essential.
Understanding which expenses are essential and which are flexible can ease a lot of anxiety as you enter retirement. For example, if you’re accustomed to spending $8,000 a month but discover that only $4,500 is truly necessary, you gain immediate clarity (and breathing room) around your finances.
Breaking expenses into clear categories also helps you make smarter decisions during market shifts. If the market turns downward and your portfolio temporarily declines, having flexible spending options allows you to scale back without disrupting your lifestyle. You might postpone a major trip or dine out less, rather than pulling more from your investments than planned.
This approach is especially important early in retirement. Avoiding excessive withdrawals from invested assets in those first years can help preserve long-term growth potential and give your portfolio time to recover, putting you in a stronger position as retirement continues.
2. Plan for Taxes
Unless all your money is in an after-tax account or Roth IRA, you’ll have to deal with taxes in retirement. Having your mortgage paid off before retirement is a common—and excellent—goal. However, don’t make the false assumption that no mortgage equals no payments.
Part of your monthly mortgage payment may be going toward property taxes and homeowners insurance if you escrow. Don’t forget that you still have to pay these bills when your home is fully paid off, and these figures must be included in your budget (and remember that these numbers will be inflating over time as well). One way to handle property taxes and homeowners insurance in retirement is to set aside money every month, just like you did with your mortgage. This way, you will have the funds available when those bills are due.
Property taxes won’t be the only taxes you’ll owe in retirement. Distributions from 401(k)s, 403(b)s, and IRA accounts will most likely be considered taxable income. Even your Social Security benefits may be taxable, depending on your overall income. It’s critical that you withhold and pay the proper taxes, so you don’t get into a large tax bill situation. A competent tax preparer can help with this.
3. Turn These Retirement Budgeting Tips Into a Plan
A retirement budget works best when it reflects more than your monthly expenses. Taxes, investments, healthcare costs, and the way you draw income from your savings can all affect how much you have available to spend over the years.
That’s why these retirement budgeting tips are only one part of the planning process. At Wilkinson Wealth Management, we help clients connect their spending decisions with their investments, income needs, and long-term goals so they can see how the pieces work together.
If you’d like help building a retirement plan around the life you want to live, reach out to us at (434) 202-2521 or use our Contact Us page to schedule an appointment.
About Mitchell
Mitchell Moore is a financial planner with Wilkinson Wealth Management, a financial services firm of CFPs in Charlottesville, Virginia, providing customized financial planning and investment strategies with a personal approach. After completing a BS in Business Financial Planning from Virginia Tech, as well as a financial services internship, Mitchell found himself ready for the chance to jump-start his career. He applied for a position at Wilkinson and moved to Charlottesville after accepting the offer. He is very excited to grow and learn alongside our team.
Mitchell enjoys spending time exploring the local scene. He is the youngest of three boys and a tinkerer like his father. When he isn’t working on his current project restoring an old boat, he loves getting outdoors to fish and hike. He’s also an avid VT football fan and likes to watch their games.
This article was prepared for Mitchell Moore’s use.